Assignment Prompt & Instructions
see attached
– ## Week7MBA599RESP.docx
**## Week7MBA599RESP.docx**
1
4
**SEE BID- Wk7dismba…. to help with the response. Please Response to the two Peer below.**
· Review your classmates' answers and find two with which your companies' valuations differ.
· Compare your analyses and conclusions with those of other students.
**Please cite 2-3 scholary authors.**
**1A**
This exercise determines McDonald’s financial worth by using the four valuation methods: net worth, net income, price-earnings (P/E) ratio, and outstanding shares (market capitalization), as outlined in our textbook, Strategic Management (David, David, & David, 2023).
**Step 1:**
**Four Valuation Methods**
**1. Net Worth Method**
This method assesses the value of a company or individual by subtracting total liabilities from total assets.
**Formula:** Net Worth = Total Assets − Total Liabilities
From FY 2024 balance sheet:
· Total assets = $55.18 B
· Total liabilities = $58.98 B
**Calculation:**
$55.18 B − $58.98 B = −$3.80 B
**Result:** **–$3.80 B**(Negative equity due to years of share repurchases and high leverage.)
**2. Net Income Method**
This method determines a company's value by calculating its net income, which is the profit remaining after subtracting all expenses such as operational costs, cost of goods sold, taxes, and interest from total revenue. A positive net income indicates profitability, while a negative net income signifies a loss.
**Formula:** Valuation = Net Income / Desired Rate of Return
From FY 2024 income statement:
· Net income = $8.22 B
· Desired return = 10% (Assuming a target return on equity of 10%)
**Calculation:**
$8.22 B / 0.10 = $82.2 B
**Result:** **$82.2 B**
**3. Price–Earnings (P/E) Ratio Method**
This approach calculates value by dividing a company's stock price by its earnings per share (EPS).
**Formula:** Valuation = EPS * Industry P/E * Shares Outstanding
From FY 2024 data:
· Earnings per share (EPS) ≈ $9.14
· Industry P/E (restaurants/QSR) ≈ 25
· Shares outstanding ≈ 1.02 B
**Calculation:**
$9.14 * 25 * 1.02 B = $233 B
**Result:** **$233 B**
**4. Outstanding Shares Method**
This method determines a company's market capitalization by multiplying the current stock price by the total number of outstanding shares, which are the shares held by all shareholders (including institutional investors, company insiders, and the public).
**Formula:** Market Cap = Outstanding Shares * Stock Price
From market close at FY 2024 year-end:
· Stock price = $290
· Outstanding Shares ≈ 1.02 B
**Calculation:**
$290 * 1.02 B = $296 B
**Result:** **$296 B**
**Step 2:**
**Average of the Four Methods**
(−$3.80 B + $82.2 B + $233 B + $296 B) = $607.4 B / 4 ≈ $151.85 B
**Estimated Average Valuation:** **$151.85 B**
McDonald’s is worth an estimated $151.85 billion.
**Step 3:**
**Analysis and Interpretation**
The net worth method underestimates McDonald's because GAAP book value doesn’t include brand value, franchise rights, and other intangibles. The net income approach offers a conservative estimate based on earnings power, while the P/E ratio and market capitalization methods reflect investor faith in McDonald's long-term brand equity and international market position. The disparity between book value and market-based valuations highlights the importance of intangible assets and premium pricing of the Quick Service Restaurant (QSR) industry.
My results are consistent with the market-based strategies but possibly vary in net worth depending on liability categorizations used. I thought that the general feelings would be that most people believed that market capitalization is the most attainable value for McDonald's as it captures brand equity and the belief of growth, factors not captured in book value (David et al., 2023).
**References**
David, F. R., David, F. R., & David, M. E. (2023).
_Strategic management_ (18th ed.). Pearson Education.
[https://www.pearson.com/en-us/subject-catalog/p/strategic-management/P200000006834](https://www.pearson.com/en-us/subject-catalog/p/strategic-management/P200000006834)
McDonald’s Corporation. (2025).
_2024 annual report_.
[https://corporate.mcdonalds.com](https://corporate.mcdonalds.com/)
**1B…** McDonald’s valuation using four methods, 2021 data based on Cohesion Case
1) Net worth method
Net worth equals total assets minus total liabilities.
Total assets 53,854 million, total liabilities 58,455 million, net worth equals negative 4,601 million. The negative equity reflects very large treasury stock and a leveraged balance sheet, which the exhibits show in the equity and debt lines. (McDonald’s Corporation, 2021a).
2) Net income method
Net income 2021 equals 7,545 million. Capitalize at five percent, a standard teaching assumption for this method in the text, which converts a steady level of earnings into firm value.
Value equals 7,545 divided by 0.05 equals 150,900 million. This method treats 2021 earnings as a perpetuity and ignores capital structure detail, which is why it stands far above book value. (David et al., 2023; McDonald’s Corporation, 2021a).
3) Price earnings ratio method
Multiply 2021 net income by an earnings multiple. Using a multiple of twenty five, a conservative long run multiple used for large, stable, branded consumer companies in many teaching examples, gives 188,625 million. This is a market anchored approach rather than an accounting anchored approach and it implicitly prices the brand and operating model rather than the book equity base. (David et al., 2023; Value Line Investment Survey, 2024).
4) Outstanding shares method
Multiply 2021 earnings per share by the number of shares outstanding. Earnings per share equals 10.04, shares outstanding equals 740.0 million, product equals 7,429.6 million which is 7.43 billion. This equity method mirrors what common shareholders “own” through earnings per share and share count in the year, independent of any market price input. (McDonald’s Corporation, 2021a).
Average across the four methods
Sum equals negative 4,601 plus 150,900 plus 188,625 plus 7,429.6 equals 342,353.6 million.
Average equals 342,353.6 divided by 4 equals 85,588.4 million which is about 85.59 billion.
Estimated corporate value, four-method average, 2021: 85.59 billion.
Why the four methods disagree
The net worth result is negative because the equity section shows a large treasury stock balance and the liabilities section shows substantial long term debt. In the 2021 balance sheet, total equity is negative 4,601 million which is the direct driver of a negative book value. That is a capital structure choice rather than an indication of operating weakness, since the income statement shows a sharp rebound in operating income to 10,356 million and net income to 7,545 million in 2021. Gross profit rose twenty eight percent and operating expenses declined thirty two percent year over year, which explains the large spread between book value and earnings based values. (McDonald’s Corporation, 2021a).
The net income and price earnings ratio results are so much higher because they reflect the cash generation power of the asset light franchise system that dominates McDonald’s revenue mix. The exhibits show that fees from franchised restaurants produced 13,085 million in 2021, up from 10,726 million in 2020, and company operated sales recovered to 9,787 million. Operating income by segment also rebounded strongly in both the United States and the International Operated Markets group. When a business can convert that fee-driven model into double digit margins, capitalization and multiple methods will naturally yield values far above book value. (McDonald’s Corporation, 2021a).
The outstanding shares method gives the smallest figure because it embeds only one year of earnings per share without any market pricing or perpetuity assumption. It is a very conservative, almost floor-like, view of value for a profitable, growing global franchisor. Earnings per share of 10.04 along with 740 million shares shows strong per share profitability after a year of recovery in comparable sales across regions, which Q3 2021 shows double digit comparable gains in the nine country International Operated Markets group and the eighty country International Developmental Licensed group. (McDonald’s Corporation, 2021b).
The revenue and segment in the cohesion case point to three operating facts that help explain the high earnings based values. First, the business is diversified across the United States, nine large International Operated Markets, and about eighty licensed markets, and all three segments saw sales or fee recovery in 2021 after the pandemic trough. The United States reached 43,344 million in systemwide segment revenue, and the nine country group reached 33,097 million, which flowed through to operating income growth of 4,755 million and 5,130 million respectively. A broad based rebound like that lowers earnings risk, which supports a lower capitalization rate and a higher multiple in methods two and three. (McDonald’s Corporation, 2021a).
Second, the franchise fee engine is again the primary contributor. Fees from franchised restaurants at 13,085 million exceeded company restaurant sales of 9,787 million. The fee model requires less capital, reduces working capital needs, and therefore supports higher returns on assets and higher sustainable payout capacity. That naturally pulls the earnings capitalization value up relative to any asset based measure that penalizes the company for carrying little owned restaurant plant on the balance sheet. (McDonald’s Corporation, 2021a).
Third, 2021 cost discipline shows up in the income statement. Operating expenses fell by nearly one third while gross profit rose by more than one quarter. That operating leverage is visible in the move in EBIT from 6,341 million to 10,356 million. The faster EBIT growth relative to revenue growth improves both the earnings multiple and the appropriate capitalization rate in a way that book value cannot capture, again favoring earnings based approaches in this specific year. (McDonald’s Corporation, 2021a).
What the average means for decision makers
The 85.59 billion four-method average is a simple way to synthesize very different perspectives on value. Book value is a statement of capital structure at a point in time. The earnings methods are statements about the ability of the brand and operating system to generate cash flow every year. For a franchisor with negative book equity but strong and rising profitability, decision makers should lean more heavily on the earnings approaches to judge strategic capacity, while continuing to monitor leverage and equity structure to understand financial flexibility and risk. This is the approach encouraged in the Strategic Management text when using multiple simple valuation lenses in class to support strategic discussion rather than to substitute for a full discounted cash flow model. (David et al., 2023).
References
David, F. R., David, F. R., and David, M. E. 2023. Strategic Management, eighteenth edition. Pearson Education.
McDonald’s Corporation. 2021a. Annual Report to Shareholders, fiscal year 2021. Chicago, Illinois.
McDonald’s Corporation. 2021b. Quarterly Report, third quarter 2021 comparable sales summary. Chicago, Illinois.
Value Line Investment Survey. 2024. McDonald’s Corporation equity research report. New York, New York.
**## Week7MBA599RESP.docx**
1
4
**SEE BID- Wk7dismba…. to help with the response. Please Response to the two Peer below.**
· Review your classmates' answers and find two with which your companies' valuations differ.
· Compare your analyses and conclusions with those of other students.
**Please cite 2-3 scholary authors.**
**1A**
This exercise determines McDonald’s financial worth by using the four valuation methods: net worth, net income, price-earnings (P/E) ratio, and outstanding shares (market capitalization), as outlined in our textbook, Strategic Management (David, David, & David, 2023).
**Step 1:**
**Four Valuation Methods**
**1. Net Worth Method**
This method assesses the value of a company or individual by subtracting total liabilities from total assets.
**Formula:** Net Worth = Total Assets − Total Liabilities
From FY 2024 balance sheet:
· Total assets = $55.18 B
· Total liabilities = $58.98 B
**Calculation:**
$55.18 B − $58.98 B = −$3.80 B
**Result:** **–$3.80 B**(Negative equity due to years of share repurchases and high leverage.)
**2. Net Income Method**
This method determines a company's value by calculating its net income, which is the profit remaining after subtracting all expenses such as operational costs, cost of goods sold, taxes, and interest from total revenue. A positive net income indicates profitability, while a negative net income signifies a loss.
**Formula:** Valuation = Net Income / Desired Rate of Return
From FY 2024 income statement:
· Net income = $8.22 B
· Desired return = 10% (Assuming a target return on equity of 10%)
**Calculation:**
$8.22 B / 0.10 = $82.2 B
**Result:** **$82.2 B**
**3. Price–Earnings (P/E) Ratio Method**
This approach calculates value by dividing a company's stock price by its earnings per share (EPS).
**Formula:** Valuation = EPS * Industry P/E * Shares Outstanding
From FY 2024 data:
· Earnings per share (EPS) ≈ $9.14
· Industry P/E (restaurants/QSR) ≈ 25
· Shares outstanding ≈ 1.02 B
**Calculation:**
$9.14 * 25 * 1.02 B = $233 B
**Result:** **$233 B**
**4. Outstanding Shares Method**
This method determines a company's market capitalization by multiplying the current stock price by the total number of outstanding shares, which are the shares held by all shareholders (including institutional investors, company insiders, and the public).
**Formula:** Market Cap = Outstanding Shares * Stock Price
From market close at FY 2024 year-end:
· Stock price = $290
· Outstanding Shares ≈ 1.02 B
**Calculation:**
$290 * 1.02 B = $296 B
**Result:** **$296 B**
**Step 2:**
**Average of the Four Methods**
(−$3.80 B + $82.2 B + $233 B + $296 B) = $607.4 B / 4 ≈ $151.85 B
**Estimated Average Valuation:** **$151.85 B**
McDonald’s is worth an estimated $151.85 billion.
**Step 3:**
**Analysis and Interpretation**
The net worth method underestimates McDonald's because GAAP book value doesn’t include brand value, franchise rights, and other intangibles. The net income approach offers a conservative estimate based on earnings power, while the P/E ratio and market capitalization methods reflect investor faith in McDonald's long-term brand equity and international market position. The disparity between book value and market-based valuations highlights the importance of intangible assets and premium pricing of the Quick Service Restaurant (QSR) industry.
My results are consistent with the market-based strategies but possibly vary in net worth depending on liability categorizations used. I thought that the general feelings would be that most people believed that market capitalization is the most attainable value for McDonald's as it captures brand equity and the belief of growth, factors not captured in book value (David et al., 2023).
**References**
David, F. R., David, F. R., & David, M. E. (2023).
_Strategic management_ (18th ed.). Pearson Education.
[https://www.pearson.com/en-us/subject-catalog/p/strategic-management/P200000006834](https://www.pearson.com/en-us/subject-catalog/p/strategic-management/P200000006834)
McDonald’s Corporation. (2025).
_2024 annual report_.
[https://corporate.mcdonalds.com](https://corporate.mcdonalds.com/)
**1B…** McDonald’s valuation using four methods, 2021 data based on Cohesion Case
1) Net worth method
Net worth equals total assets minus total liabilities.
Total assets 53,854 million, total liabilities 58,455 million, net worth equals negative 4,601 million. The negative equity reflects very large treasury stock and a leveraged balance sheet, which the exhibits show in the equity and debt lines. (McDonald’s Corporation, 2021a).
2) Net income method
Net income 2021 equals 7,545 million. Capitalize at five percent, a standard teaching assumption for this method in the text, which converts a steady level of earnings into firm value.
Value equals 7,545 divided by 0.05 equals 150,900 million. This method treats 2021 earnings as a perpetuity and ignores capital structure detail, which is why it stands far above book value. (David et al., 2023; McDonald’s Corporation, 2021a).
3) Price earnings ratio method
Multiply 2021 net income by an earnings multiple. Using a multiple of twenty five, a conservative long run multiple used for large, stable, branded consumer companies in many teaching examples, gives 188,625 million. This is a market anchored approach rather than an accounting anchored approach and it implicitly prices the brand and operating model rather than the book equity base. (David et al., 2023; Value Line Investment Survey, 2024).
4) Outstanding shares method
Multiply 2021 earnings per share by the number of shares outstanding. Earnings per share equals 10.04, shares outstanding equals 740.0 million, product equals 7,429.6 million which is 7.43 billion. This equity method mirrors what common shareholders “own” through earnings per share and share count in the year, independent of any market price input. (McDonald’s Corporation, 2021a).
Average across the four methods
Sum equals negative 4,601 plus 150,900 plus 188,625 plus 7,429.6 equals 342,353.6 million.
Average equals 342,353.6 divided by 4 equals 85,588.4 million which is about 85.59 billion.
Estimated corporate value, four-method average, 2021: 85.59 billion.
Why the four methods disagree
The net worth result is negative because the equity section shows a large treasury stock balance and the liabilities section shows substantial long term debt. In the 2021 balance sheet, total equity is negative 4,601 million which is the direct driver of a negative book value. That is a capital structure choice rather than an indication of operating weakness, since the income statement shows a sharp rebound in operating income to 10,356 million and net income to 7,545 million in 2021. Gross profit rose twenty eight percent and operating expenses declined thirty two percent year over year, which explains the large spread between book value and earnings based values. (McDonald’s Corporation, 2021a).
The net income and price earnings ratio results are so much higher because they reflect the cash generation power of the asset light franchise system that dominates McDonald’s revenue mix. The exhibits show that fees from franchised restaurants produced 13,085 million in 2021, up from 10,726 million in 2020, and company operated sales recovered to 9,787 million. Operating income by segment also rebounded strongly in both the United States and the International Operated Markets group. When a business can convert that fee-driven model into double digit margins, capitalization and multiple methods will naturally yield values far above book value. (McDonald’s Corporation, 2021a).
The outstanding shares method gives the smallest figure because it embeds only one year of earnings per share without any market pricing or perpetuity assumption. It is a very conservative, almost floor-like, view of value for a profitable, growing global franchisor. Earnings per share of 10.04 along with 740 million shares shows strong per share profitability after a year of recovery in comparable sales across regions, which Q3 2021 shows double digit comparable gains in the nine country International Operated Markets group and the eighty country International Developmental Licensed group. (McDonald’s Corporation, 2021b).
The revenue and segment in the cohesion case point to three operating facts that help explain the high earnings based values. First, the business is diversified across the United States, nine large International Operated Markets, and about eighty licensed markets, and all three segments saw sales or fee recovery in 2021 after the pandemic trough. The United States reached 43,344 million in systemwide segment revenue, and the nine country group reached 33,097 million, which flowed through to operating income growth of 4,755 million and 5,130 million respectively. A broad based rebound like that lowers earnings risk, which supports a lower capitalization rate and a higher multiple in methods two and three. (McDonald’s Corporation, 2021a).
Second, the franchise fee engine is again the primary contributor. Fees from franchised restaurants at 13,085 million exceeded company restaurant sales of 9,787 million. The fee model requires less capital, reduces working capital needs, and therefore supports higher returns on assets and higher sustainable payout capacity. That naturally pulls the earnings capitalization value up relative to any asset based measure that penalizes the company for carrying little owned restaurant plant on the balance sheet. (McDonald’s Corporation, 2021a).
Third, 2021 cost discipline shows up in the income statement. Operating expenses fell by nearly one third while gross profit rose by more than one quarter. That operating leverage is visible in the move in EBIT from 6,341 million to 10,356 million. The faster EBIT growth relative to revenue growth improves both the earnings multiple and the appropriate capitalization rate in a way that book value cannot capture, again favoring earnings based approaches in this specific year. (McDonald’s Corporation, 2021a).
What the average means for decision makers
The 85.59 billion four-method average is a simple way to synthesize very different perspectives on value. Book value is a statement of capital structure at a point in time. The earnings methods are statements about the ability of the brand and operating system to generate cash flow every year. For a franchisor with negative book equity but strong and rising profitability, decision makers should lean more heavily on the earnings approaches to judge strategic capacity, while continuing to monitor leverage and equity structure to understand financial flexibility and risk. This is the approach encouraged in the Strategic Management text when using multiple simple valuation lenses in class to support strategic discussion rather than to substitute for a full discounted cash flow model. (David et al., 2023).
References
David, F. R., David, F. R., and David, M. E. 2023. Strategic Management, eighteenth edition. Pearson Education.
McDonald’s Corporation. 2021a. Annual Report to Shareholders, fiscal year 2021. Chicago, Illinois.
McDonald’s Corporation. 2021b. Quarterly Report, third quarter 2021 comparable sales summary. Chicago, Illinois.
Value Line Investment Survey. 2024. McDonald’s Corporation equity research report. New York, New York.